Congress must rein in frivolous lawsuits

Competitive innovation drives the American system of private enterprise. When businesses enter a market, their goal is to produce a superior, cheaper product than a competitor’s. In turn, competitors can counter a market entry with their own improvements or price cuts.

Patent law, when correctly applied, protects the intellectual property of small, entrepreneurial businesses. However, many companies engage in “trolling,” the subject of significant Congressional action. Patent trolling twists the legal rationale behind such protection, allowing large companies (the patent holders) to use their sizable legal resources to sue another company – often a small business - for infringement on what is often a questionable or invalid patent.

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Since the target can’t afford a protracted court case, the troll usually accepts an out-of-court settlement, leaving the validity of its patents unjudged. This subtle form of extortion continues until a defendant stands up to the bullying.

Troll litigation costs U.S. businesses $80 billion a year, according to The Internet Association. All told, 7,000 businesses were sued by patent trolls in 2011 and 2012, the association reported, four times as many as were sued in 2006.

The legislation seeks to continue to protect legitimate patent holders, and penalize a plaintiff if a case is deemed frivolous, say by forcing it to pay attorneys’ fees and damages. This would significantly alter the risk-reward ratio that trolls currently enjoy.

Patent reform deserves support from small businesses. Patent trolls, or troll-like behavior, sap the entrepreneurial energy for innovation and change by increasing the costs for start-ups, chilling the zeal for innovation and artificially inflating the risk of investing in new technology and ideas.

Those who fear that patent reform will only benefit large companies should consider the trends. In legitimate patent suits, the smaller company is usually the plaintiff, the larger one the defendant. With trolls, it’s the other way around. Most trolls are large entities suing small entrepreneurial companies who are trying to bring innovation and change.

And this is seen in all industries.

For example, in the past two years, Procter & Gamble (P&G) has brought patent suits against two manufacturers of private label, lower cost, generic-brand teeth-whitening strips. One generic-brand manufacturer in particular – New Jersey-based CLIO USA – faces a patent litigation challenge by P&G, which is intended to thwart competition and monopolize the market.

P&G’s patent troll-like actions to drive generic brands out of stores will raise prices and disproportionately affect the wallets of women, who purchase the largest share of whitening products.

P&G’s actions are merely one of many examples of large companies preying on small-size competitors through patent trolling, but it is a perfect illustration of a company vulnerable to profit losses (a 2010 market analysis report by the University of Pennsylvania’s Wharton School recommended that P&G lower prices) which uses litigation to keep profits steady, competition low, and prices high for consumers.

Patent trolling will continue as long as it’s profitable. Good patent policy will remove the incentive to press claims on dubious patents, whether the underlying motive is to extract an undue royalty or block legitimate competition and innovation.

Bigger is not necessarily bad, but market dominance should come from persuading the public to buy your products, not from a dubious patent portfolio and army of lawyers to defend them.